How Much Can I Borrow on a Reverse Mortgage?
For homeowners in need of extra cash, a reverse mortgage can sometimes be a good fit. It allows you to unlock equity from your home and use the money for almost any purpose. However, it can be a complicated process and is not right for everyone.
Homeowners who are considering a reverse mortgage may want to know how much they can borrow – in other words, how much of their home equity can they unlock?
What is the Borrowing Limit?
The most common type of reverse mortgage is the Home Equity Conversion Mortgage (HECM) overseen by the Federal Housing Administration (FHA). There are limits on how much you can borrow with this type of loan. Currently, in 2018, the maximum amount is $679,650.
Of course, you can’t borrow the full value of your home. Under guidelines established by the FHA and Department of Housing and Urban Development (HUD), the most you can borrow with a reverse mortgage is about 80% of your home’s value.
However, most people can’t borrow even that much. That’s because the maximum amount depends on the borrower’s age and the interest rate. The government has a table showing how much you can borrow depending on your age and your interest rate. You can download the full table here.
To see what a difference your age makes, take a look at the chart below:
|4% interest rate||5% interest rate||6% interest rate|
|65 year old borrower||49%||43%||38%|
|90 year old borrower||69%||65%||62%|
Maximum percentage of home equity that can be borrowed in a HECM (Source)
This maximum is known as the “principal limit factor” (PLF) and is derived from a calculation that is set by the government. Note that if there are two owners of the home, the youngest homeowner’s age is the one that counts in this formula.
For an example, let’s say your home is currently worth $400,000 and you are the youngest owner of the home at 65 years old. If you’re taking out a reverse mortgage with an expected interest rate of 5% then your PLF would be around 43%. In that case, the calculation will look something like this:
$400,000 x 0.43 = $172,000
This amount is the maximum you can borrow on a reverse mortgage. However, that doesn’t mean you’ll actually be able to borrow that full amount.
Other Factors Affecting How Much You Can Borrow
The above calculation isn’t a one size fits all amount. How much you can actually borrow from a reverse mortgage product may be higher or lower depending on a number of factors, including:
Your home’s current appraised value
In order to get a reverse mortgage, you will typically need to get your home appraised. The appraiser will take a look at your house and compare it to other recent transactions in order to make an estimate of its value. The home appraisal determines sets the value of your home for determining how much you can borrow.
Other financial obligations
Lenders will assess whether they need to help you pay off other loans on your home before giving you the loan proceeds. For example, if you have an outstanding mortgage, the lender will usually have to pay that off before giving you the remaining amount.
Let’s say the lender approves you for $250,000 but you still have a $50,000 mortgage balance. After subtracting that amount, you would be left with $200,000.
But that’s not all. Lenders will also do a financial assessment to see whether they need to set aside a certain amount of money for home expenses that are expected during the borrower’s remaining lifetime. This could include property taxes, flood and homeowner’s insurance premiums. This amount is called the life expectancy set aside (LESA). To calculate whether you need a LESA, the lender will look at your income and assets and subtract it from any debts and living expenses. The remaining amount is then compared to a threshold determined by the government to see if you have enough residual income to pass. If you do, then the lender doesn’t need to withhold funds. If you don’t, then the lender will need to set aside money to pay for ongoing fees associated with the property.
Your credit score
Even if you pass the lender’s financial assessment, your lender may require a LESA if your credit score isn’t great. A lower credit score could indicate an increased degree of risk that you might default on your financial obligations for your property.
Remember, just because you know what you may qualify for, it doesn’t mean that’s the exact amount you’ll get. The only way to determine that is by speaking with a reverse mortgage professional. You should also learn about alternative ways to tap into your home equity, like the Unison HomeOwner program before you make the choice to use a reverse mortgage.